AKAMAI MONEY
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By Deborah Adamson
Advertiser Staff Writer
Q. My in-laws want to start a savings plan for my kids. Are there any plans that can be used for all types of education, instead of just tertiary education?
— Jerry Linville, Kaimuki.
A. Many tax-deferred education savings plans are geared toward paying for college, because it's generally more expensive than other levels of schooling.
As such, parents are left with fewer options if they want a tax-advantaged plan to pay for private elementary or high school.
Among plans with tax benefits, only the Coverdell Education Savings Accounts let you pay for primary, secondary as well as college and beyond, said Michael Iraha, a certified financial planner in Honolulu.
But "the problem with the Coverdell is the limitation in the amount you can contribute a year — $2,000," said Dennis de Stefano, a fee-only certified financial planner at Stefano Wealth Management in Kihei.
You can't roll over money from another account to the Coverdell; the only rollovers allowed are from another Coverdell account, said Lesley Brey, a fee-only financial planner in Niu Valley. Also, money in the Coverdell has to be completely used up by the time the beneficiary turns 30, she said.
There are income limitations, too. If you make an adjusted gross income of more than $220,000 a year as a couple, you can't qualify for a Coverdell. If you make between $190,000 to $220,000, you can put only a portion of the $2,000 away.
But one could argue that if your income hits that level, you wouldn't need a Coverdell in the first place.
But even with all its limitations, you should still consider opening a Coverdell account if you qualify. But supplement the plan with other accounts.
One caveat: You can choose how to invest your Coverdell. If you have fewer than three years before you'll need the money for tuition, don't invest it in the stock market, said Roberta Lee-Driscoll, a certified financial planner in Honolulu. There's not enough time to ride out the potential volatility of the stock market.
Another popular educational savings plan is the 529 plan. Every state has at least one plan, which is geared towards paying for college. Your money grows tax-deferred and any withdrawals to pay for education are not taxed federally until 2010, or longer if Congress extends the tax break. There are no income limits. In Hawai'i, you can put in up to $305,000 per beneficiary.
Although the 529 is mainly used for college, the plan also can be used to pay for vocational or trade school as long as they're accredited.
Your in-laws also can set up custodial accounts for your children. In Hawai'i, it would be under the Uniform Transfers to Minors Act. It's your children's account, but grandparents remain custodians until the kids reach the age of majority. In Hawai'i, that would be 21, Lee-Driscoll said. But these accounts are taxable, and you technically give up control when your child is of age.
"If they want to take a trip to Tahiti instead of going to college, they can," de Stefano said.
Although that's technically true, parents still have to sign over the account to their child, Lee-Driscoll said. If they don't want to, one recourse is to sue them — an option distasteful to many.
If your children are currently attending school, one option is for the grandparents to pay the tuition directly, Brey said. As such, they won't have to worry about the gift tax because it won't count as a gift.
A taxpayer is allowed to give away $11,000 tax-free annually. Anything above that amount is taxable to the donor, unless he or she decides to use up part of the lifetime tax exemption allowed of $1 million.
Got a consumer or personal finance question? Contact Deborah Adamson at dadamson@honoluluadvertiser.com or 525-8088.
