Charitable Gifting Can Provide Exponential Benefits
One way to consider the incredible potential of certain charitable investments is to consider what a college education means to a child. Studies show that people who earn a bachelor’s degree can expect to accumulate nearly $1 million more during their working years than those with only a high school education. This means that to ensure money for that college education is essentially making a $1 million gift to that child; quite a present!
Two Options for Education Charitable Gifting
Coverdell Education Savings Accounts and 529 Plans
As you think about the youngsters in your family this holiday season and the benefits of investing in their education, consider that along with making a life-long gift to the recipient, you will make yourself eligible for tax benefits. Thanks to the newly revamped Section 529 plans and Coverdell Education Savings Accounts (ESAs), you can now help your children and grandchildren reach their educational goals while significantly reducing the size of your taxable estate.
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The Coverdell ESA, once known as the Education IRA, allows you to contribute up to $2,000 a year to each child (under age 18). You maintain control of the investments, which potentially can grow tax deferred and may be withdrawn free of federal taxes for qualified expenses. Funds may be used to cover not only college but also elementary and secondary school expenses, including tuition, books, room and board, uniforms, supplies — even a computer.
Contributions to ESAs are restricted for those whose modified adjusted gross income exceeds $95,000 (single filers) or $190,000 (joint filers). Also, because ESA funds become the student's asset at age 18, they may limit financial aid eligibility.
Section 529 Plans
State-sponsored 529 plans allow you to donate as much as $11,000 per year ($22,000 for married couples) for a child’s higher-education expenses. Your 529 plan funds can grow tax deferred, and withdrawals made for qualified education expenses are free of federal tax. Qualified withdrawals from 529 plans are limited to higher-education expenses; they may not be used for elementary or secondary school expenses.
Plans may be structured as prepaid tuition programs, which allow you to pay for tomorrow’s education at today's rates, or 529 savings plans, which invest in a variety of age-based portfolios that typically become more conservative as the time for college nears.
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The tax implications of 529 plans should be discussed with your legal and/or tax advisors because they can vary significantly from state to state. Also note that some states’ 529 programs may provide advantages and benefits exclusively for their residents and taxpayers.
As with other investments, there are generally fees and expenses associated with participation in these savings plans. There is also the risk that the plan investments may lose money or not perform well enough to cover college costs as anticipated. Nonqualified withdrawals may be subject to income taxes and an additional 10 percent federal tax penalty.
Charitable Gifting at its Potential Best
Giving the gift of education can be both emotionally and financially rewarding. Helping the young people in your family earn a college degree may provide returns that will last a lifetime.