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If you are a parent or grandparent who is thinking ahead and want to save money for your minor children and grandchildren there are a few ways to save that come with some tax benefits 

The easiest way to save money for a child or grandchild is to set up a simple bank account called an UGMA (Uniform Gifts to Minors Act) or a UTMA (Uniform Transfers to Minors Act) account.  UGMA and UTMA plans put money into a savings or investment account, which can be used for any purpose including schooling, marriage or a home.  Money put into UGMA or UTMA accounts legally belongs to the child even though a parent has custodial rights.  The first $1000 income is tax free.  Earnings over $1,000 and under $2,000 is taxed at the child’s rate.  Any earnings over $2,000 in a year is taxed at the parent’s rate.  There is no limit to amounts you can put in an UGMA or UTMA but if you want to avoid filing gift tax returns, the limit in 2017 is $14,000 per person.  So a married couple could give $28,000 to a grandchild without filing a gift tax return.

Another popular way to save money for schooling is a Qualified Tuition Program (QTP) sometimes called a 529 plan or an Education Savings Account (ESA) 530 plan.

Michigan allows a deduction for contributions to a Michigan 529 or 530 plan but there is no federal deduction.  A 529 grows tax-free and there is no tax on withdrawals as long as they are used for college or higher education.

Contributions to a 529 vary based on actuarial tables necessary to cover qualified undergraduate and graduate expenses in the future.  Contributions to a 530 plan are limited to $2,000 per year but cover undergraduate, graduate and K-12. 

You may contribute to a 529 and a 530 plan in the same year for the same individual.  Contributor’s to a 529 may change beneficiaries or reclaim funds if desired.  A drawback to the 530 plan is that contributions may be limited as the contributor’s income increases.

Other rules and limitations apply so consult an investment advisor whenever opening a 529 or 530 educational saving account.

Another option you may consider is to withdraw savings from an IRA to pay the qualified educational expenses for yourself, a spouse, child or grandchild.  The 10% early withdrawal penalty is waived in the above circumstance.

A tax-free savings bond can also be purchased to pay for children and grandchildren’s educational expenses.  Income phase-outs and other limitations apply so again consult with an investment advisor to determine if a tax-free bond is the right choice.

 

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