More uses for Coverdell

Paying for a child’s college education is often a stressful ordeal for parents, which is why there are plans such as the Coverdell Education Savings Account (CESA) and Section 529 that assist with payment. Unfortunately for parents using the CESA, this method is not the best way to save up, as it has a much lower contribution limit than the Section 529 plan. The money contributed to this account can hardly be considered useless though, as there are multiple alternatives that can be used to capitalize on these tax-free distributions

Though a 529 is better for college savings, a CESA can help pay for private schooling.

The CESA, under current law, allows for parents or grandparents to contribute up to $2,000 annually per child or grandchild. After the contributions are made, the account can grow on a tax-deferred basis and money can be withdrawn, tax-free, to pay for school related expenses. … Read More

The Viagra College Fund Phenomenon

Mary Beth Franklin (contributing editor for published an interesting piece recently. In it, she describes a Social Security benefit strategy which she titles The Viagra College Fund.

This college fund strategy applies to retirement age fathers with children who are still minors. These children can be your natural children, adopted children or dependent stepchildren.

The first step of the strategy is for you to reach the official retirement age. Once you hit full retirement age, your earnings cap is removed and you can continue to work without lowering your benefits. You are also allowed to postpone filing, electing to suspend your Social Security benefits instead.

If you have a child who is a minor, your suspension will automatically trigger a monthly payment for your dependent. This payment is worth 50% of the full retirement benefit you would receive.

To further improve the situation, the payments received by your dependent do … Read More

529 Plans: Invest for Anyone

529 plans allow people to save for college and the costs of higher education. In MN this is called the “Minnesota College Savings Plan”. This flexible plan allows any U.S. citizen over 18 years of age to open an account on behalf of a beneficiary.

There are numerous benefits that go along with the College Savings Plan. There are no federal or state tax deductions for contributions to the fund. However, all of the account earnings are considered “tax-free investment income”, meaning they are not subject to federal or state income tax.

Any distributions for qualifying higher education expenses (including tuition, books or supplies are also tax free. Room and board is also permitted as an education expense if the student is enrolled more than half-time. If a non-qualifying distribution is made, the earnings are taxable at the state income tax rate for your tax bracket. Furthermore, federal law assigns a … Read More