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"In 20 years a 4-year college education is expected to cost $102,839.00." Limra International
With the rising costs of college tuition, the decision as to whether or not your kids will be able to attend a public, private or community college is of great concern to parents. The best solution is to begin saving early so you can maximize the time and investment opportunities available. Of the few investment vehicles that the Internal Revenue Service (IRS) allows you to use to save for your children’s college education, the Uniform Gifts to Minors Act (UGMA) and the Uniform Transfer to Minors Act (UTMA) are among the best. What is the UGMA? The UGMA provides a way to give gifts of cash, securities, bank accounts and mutual funds to a child. This act establishes the role of the custodian of the assets. When the child reaches the age of majority, the account becomes the child’s property. What is the UTMA? The UTMA allows the transfer of any type of property or partnership interests to a child. This act works similar to the UGMA. Who is a custodian? A custodian is usually a parent or guardian of the child. In most states, a trust company or bank may act as custodian as well. The duties of a custodian include collecting, holding, managing and investing the custodial property. The custodian is responsible for keeping records of all the transactions with respect to the custodial property. Who owns the assets in a custodial account? Gifts made to the custodial account are irrevocable. The child is the owner of the account; however, the custodian controls the assets. How is the unearned income taxed? Although all gifts paid to a custodial account are the property of the child, taxation will depend on the age of the child and the total income earned. Until the child reaches age 14, the "Kiddie Tax" applies. The first $700 of unearned income received by a minor in a single taxable year is free from federal income taxes. The next $700 is taxed at the minor’s marginal tax rate, which is usually 15%. Any excess income will be taxed at the marginal rate of the child’s parent. For children 14 or older, all unearned income $700 will be taxed at the child’s marginal tax rate.* Starting Early Really Pays If you begin saving early, time becomes your greatest friend; if you put off saving until later, time can become your greatest foe. Remember, the money you invest earns interest and dividends. In turn, these earnings generate additional earnings. This process is called "compounding." The sooner you start saving - even if the amounts you set aside are small - the greater the benefits you’ll receive. Over the life of your savings plan, just a few additional years of compounding can mean a difference of thousands of dollars. As the chart indicates, the person who starts early ends up with a lot more money. Getting started is easy In fact, with just $100 and $30 a month thereafter, you can begin building a position in most of our funds with our ABC Investment Plan.® When you use the ABC Investment Plan,® you’ll be using a dollar cost averaging strategy, an investment technique that lets you invest a fixed amount in a specific investment at regular intervals.* Call today For more information about opening an UGMA or UTMA or to start investing with our ABC Investment Plan,® call 1-800-US-FUNDS. |
*Investors should know that the rules for UGMA/UTMA accounts and the legal age of each minor will vary by state. The tax information in this article was current as of 1998. UGMA/UTMA accounts may affect a child’s eligibility for college financial aid. No investment plan can guarantee a profit or protect against depreciation in a declining market.
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