Ways to Save for College

A Crummey Trust is a great way to save for college. A Crummey Trust allows your child 30 days to withdrawal money after it is deposited, this stipulation allows for the first $12,000 per year to be deposited tax free. The interest on the money is also taxed at the child’s rate.

The Crummey Trust also allows you to specify at what age the child can withdrawal the money. You can also set yourself up as trustee to maintain control of the investment, although there are some legal implications.

Benefits of a Crummey Trust include:

• Trust can be continued past 18 or 21 years of age.
• Trust can be established for multiple beneficiaries.

Drawbacks of a Crummey Trust include:

• High setup and administration costs.
• Trust is treated as an asset of the child for financial aid purposes.

If you have your own business, hire your own child to work for you. This method has terrific tax benefits and is a great addition to other tax-advantaged methods of saving. This can also be a good character building activity for your child and may increase the amount of time the two of you can spend together before they head off to college.

This method will obviously not work well if you do not have your own business. It may also require you to trust your child to save part of their wages for tuition.

A Coverdell Education Savings Account, also known as an Educational Savings Account and formerly referred to as an Education IRA, is a tax-advantaged investment account for future college expenses. It is located in section 530 of the IRA Code.

Coverdell ESA’s are quite similar to 529 Plans but there are a few important differences.

Similarities to 529 Plan:

• Both allow money to grow tax deferred and the money can be withdrawn tax free for qualified educational expenses.
• With both plans, the money is considered the beneficiary’s money when applying for financial aid and can reduce the amont of aid they would receive.
• A new beneficiary can be named by the account custodian at any time

Differences from a 529 Plan:

• Coverdell ESA’s have lower contribution limits. $2,000 per child per year for an ESA, no yearly limit for a 529.
• ESA’s allow almost any investment option, including stocks and bonds, while 529’s only allow a select number of government allocation programs.
• ESA’s can be used for primary and secondary school expenses, 529’s can not.
• Donor income level may affect contribution limits with a Coverdell ESA, but not with a 529 Plan.