College Funds for the Little Ones

From one of our clients:

Question:  I have my first grandson who is 8 months old.  I would like to start some sort of college fund for him.  I would like to put like $100.00 for Christmas, Birthdays, etc.  I am interested in something that might have good tax consequences for me and or him.  Any ideas?

Answer: Congratulations on your first grandson! It is great to start saving early, and you have several different options.

          Option 1:  Uniform Gifts to Minors Act (UGMA) or Uniform Transfers to Minors Act (UTMA).  This is a custodial account, where you or your grandson’s parent(s) have the responsibility to manage the account until your grandson turns 18.  This account is setup using your grandson’s social security number and income is taxable to him.  If his taxable income is less than $800, there should be no income tax filing requirement.

          Option 2:    The Education Savings Bond Program (EE and I Bonds).  These bonds may be purchased in your grandson’s parent(s) name (if over 24 years old).  Since your grandson is their dependent, they will not have to pay taxes when the bonds are redeemed provided the qualified expenses are less than the redeemed bonds. 

Option 3:  Education Savings Accounts (ESAs).  ESA is a trust established to pay qualified education expenses of a designated beneficiary.  Contributions to this trust are non-deductible by you.  The earnings in the account are tax deferred and distributions are tax free if used for qualified educational expenses.  You are limited to $2,000 in contributions per year.  You may also be limited if your income exceeds $95,000.

          Option 4:  Qualified Tuition Programs (529 plans).  The 529 plans are very popular right now.  The Missouri 529 plan is the Missouri Savings for Tuition program (MO$T).  The Kansas 529 plan is the Learning Quest Education Savings Program (Quest).  Like the ESAs, the earnings in a 529 plan are tax deferred and distributions are tax-free if used for qualified higher education expenses.  Your contribution may also be deductible if you contribute to your resident states 529 plan. 

That is just the basic outline of several options you have.  We recommend speaking with a qualified CPA to discuss your particular situation.  Thank you for your question.