FINANCIAL PLANNING SERVICES
COVERDELL EDUCATION SAVINGS ACCOUNTS The Coverdell Education Savings Account has become outdated due to the creation of the 529 plan in 1996. The Coverdell has an annual contribution limit of $2,000 per year per beneficiary, and the growth is tax-free if used for qualified education expenses. The main benefit that the Coverdell has over the 529 plan is the ability to use the funds for elementary, grammar and high school as well as qualified colleges, universities, vocational schools or other postsecondary educational institutes. UTMAs, UGMAs AND ROTH IRAs Parents who are not sure if their child will be attending college and want to avoid the potential 10-percent penalty if a 529 plan or Coverdell account is used may consider other vehicles. In this situation a Uniform Gift to Minors (UTMA)/Universal Transfer to Minors (UGMA) or Roth IRA may be used.
The UTMA/UGMA is a custodial account owned by the minor child with the parent or other guardian listed on the account. This type of account would count as a student’s assets for financial aid calculations. The income earned by a UTMA/UGMA would also be reported on the child’s tax return. For 2017, investment income of $2,100 would have an effective tax rate of only 5 percent federally. Income in excess of $2,100 would be subject to the “kiddie tax” and would be taxable at the parent’s tax rate. A Roth IRA is a retirement account funded with after-tax money, and the growth is tax-free if held for five years and the taxpayer is age 59 ½ or older. The contributions can be withdrawn first with no tax or penalty. Roth IRAs do not count as an asset for financial aid calculations. The growth in a Roth IRA would be subject to income tax if used for education expenses when under age 59 ½ but would be exempt from
the 10-percent penalty if used for qualified higher education expenses. Contributions to a Roth IRA are limited to the lesser of earned income or $5,500 for taxpayers under age 50. Your clients’ specific circumstances would dictate which educational funding option is best for them. When deciding the account type and investment allocation, one should consider timeframe, risk tolerance and other factors including financial aid considerations. Jeffrey S. Hanson, CPA, PFS, AEP, CFP, is a financial advisor at Traphagen Financial Group, specializing in individual, trust and estate tax returns and wealth management services. He is a member of the NJCPA and can reached at jeff@tfgllc.com.
READ MORE FINANCIAL PLANNING SERVICES ARTICLES AND RESOURCES njcpa.org/topics/pfp
Learn how in our special report: A Guide to Creating Sustainable Value in Your Practice
“How can I make my firm more profitable?”
Download at 2017ValueReport.com
There’s a simple answer to your toughest challenge.
About AccountantsWorld
Amazon, Google and Facebook are all among the most valuable companies in the world. And they all have one thing in common that has helped them become so successful.
AccountantsWorld is the leading provider of cloud-based solutions for accountants. Using the power of the cloud, we’ve made it easier than ever for accountants to offer highly profitable payroll, write-up, Client Accounting Services and virtual CFO services.
You can make your accounting practice 20%, 30% or even 40% more profitable by using the same basic approach used by these iconic companies. And you’ll accomplish this growth without increasing your fees, or adding any clients or staff. What’s more, you’ll also become a better advisor and add more value to your clients’ businesses while you’re raising your bottom line.
www.AccountantsWorld.com
NEW JERSEY CPA | SEPTEMBER/OCTOBER 2017
17